If you are unable to or don't want to get a loan or credit line for financing a business, you may consider using your personal savings to finance your business. This poses a substantial risk due to the fact that you may lose your money, but many people would rather take this risk than be indebted to a bank.
Advantages of Using Your Personal Savings for Financing
Using your personal savings can be a great way to get a business off the ground and get things running while you work to secure a bank loan or line of credit elsewhere. For typical financing opportunities, you need to have a business plan in order and show a means to make money and pay the loan back. By using your money to develop a business plan and get the initial stages of the business running, you may increase your worthiness of a loan in the eyes of financers.
One nice thing about using your own savings is that you can draw only the amount that you need at any certain time instead of receiving a lump sum from a loan. You can incrementally use your savings money from different sources as you need it, with the hope that soon your new business will cover the money that you have used.
Things to Keep in Mind When Using Your Savings for Financing
1- If you plan on taking a personal loan against your retirement savings, such as a 401k, keep in mind that there are plenty of rules you need to follow or you will get stuck with some financial penalties and potentially lose some tax benefits in the future.
2- It is also recommended that if you choose to use savings for business financing, you set aside a certain portion of it to use, while saving the rest for emergency purposes. It would be unwise to drain your entire savings account on starting a business and leaving nothing for yourself to fall back on if some other need arises.
3- If you are going to need this money from your savings for something important in the near future, you may want to consider a different financing route. It is never certain that your business will take off in a certain timeframe, and you may not be able to pay the money back in time.
4 - If the money that you are borrowing from yourself isn't just yours (for example if you are married or have a significant other), be sure to fully disclose your plans to them before you borrow the money. This will ease problems down the road in the case that you can't pay yourself back in time. Full disclosure is always the best policy when it comes to money that affects someone else as well.
Borrowing from your savings can be a great way to get your business off the ground. However, weigh all your options and make sure that you can make the commitment to perhaps losing some, if not all of the money, if your business does not work out.
